Ready! Set! Refinance!

Consumers have been spoiled in recent years as 15 and 30 year mortgage interest rates have been at historic lows. Most economists agree that interest rates are poised to rise in the coming years, as our economy starts to recover and as a nation we start to tackle our debt situation. Many consumers are resetting their financial portfolios as they prepare for the future. Some are choosing to move, upsizing or downsizing, depending or personal circumstances. Others have decided to stay in the home they’ve owned for many years, but are taking a second look at mortgage agreements that were signed years ago, but are not properly aligned to today’s economic realities.

At first glance, lower interest rates, or different loan terms can be very appealing. On closer inspection, a thorough analysis requires that consumers look at three important areas:

Your Interest Rates – Current and Proposed

One of the biggest reasons people choose to refinance a loan is to reduce the interest rate on their loan. This particularly makes sense during the early years of your original loan, because you still face many years of interest and principal payments. If you are in the final years of paying off your original loan, refinancing will many times not make sense, because most of the interest is paid in the early years of a loan. Another consideration is when you refinance, you are resetting the clock. If you are 5 years into paying a 30 year loan, when you refinance, you are agreeing to a new 30 year loan, which extends your payment out 5 years further than your original loan. This may make sense, and still save you money in the long run, but we encourage you to fully understand the implications when refinancing a loan. Some consumers prefer to convert an original 30 year loan into a 15 year loan when refinancing, if they can afford the change in monthly payments.

Expected Closing Costs of New Loan

If you choose to refinance your current loan, you will incur upfront fees for a new loan. Upfront fees will typically include a loan origination and appraisal fee, points on the loan, closing and the cost of a new lender’s title insurance policy. Sometimes these fees and costs can be rolled into your monthly payments, allowing you to not have any direct out-of-pocket fees at closing. As long as you plan to stay in your home for at least a few years, these upfront fees will be offset by the money you can potentially save by refinancing.

Equity in Your Home

Because home prices have decreased in most parts of the country, your home equity may be less than what you expect at appraisal time. Lenders have become more restrictive, and appraisers have become more conservative in their home valuations. These new realities mean some homeowners may not have enough home equity to be able to refinance. The federal government does offer programs today, including their “Make Home Affordable” program that helps homeowners to refinance, even when home equity has been turned upside-down. The “Make Home Affordable” program may allow a home to be refinanced, even with a loan-to-value (LTV) as high as 125 %. Detailed information about this federal program can be found at www.makehomeaffordable.gov.

Select and finalize your loan

After considering your personal situation, if you decide to move forward with refinancing, we will typically require you to provide documentation, including paycheck stubs, W-2 forms, bank statements, and will pull a credit report to assess your overall financial situation. You will need to complete a formalized loan application, provide proof of income, have an appraisal done on your home, make arrangements to pay for closing costs, and allow time for your complete application to be processed.